PSNC 13: Pursuing PRT

June 7, 2013 (PLANSPONSOR.com) – The market for pension buyouts reached $37 billion last year. Is pension risk transfer (PRT) right for your defined benefit (DB) plan and your company? 

A panel of experts at the 2013 PLANSPONSOR National Conference discussed how plan sponsors can answer that question—and found that the challenges they face may not be what they expected.

Before the passage of the Pension Protection Act (PPA), the mindset for DB plan sponsors was a focus on returns, according to Christopher Rowlins, senior consultant at Fiduciary Investment Advisors. After, how to control funding liability—whether to employ a liability-driven investing (LDI) approach to gradually de-risk over time—is their main concern. He emphasized the importance of recognizing the liabilities in an investment framework. Rowlins warned attendees not to become complacent as the funded status of their plan improves, but to look out for opportunities to de-risk.

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When considering PRT, when is the right time to “pull the trigger”? Rowlins asked. Mark Unhoch, vice president and senior consultant at Dietrich and Associates Inc., said that as part of a dynamic de-risking strategy, plan sponsors should move to get rid of liabilities as funded status improves. But it is not necessary to wait until the plan is fully funded. There is a common misconception that plans must be 130% to 140% funded before a risk transfer process can begin. Due to the changes in lump sum regulations, however, plan sponsors can get retirees out of a plan that is 100% to 120% funded, said Scott Gaul, senior vice president of pension risk transfer at Prudential.

Plan sponsors cannot monetize surplus, he noted, and may only need their plans to be 115% funded. He advised panel attendees to know their end point and be ready for when economic conditions are right. Unhoch agreed, and suggested plan sponsors go to the market to find their number—there could be a 10% difference between what plan sponsors think their plans need and what is required for a PRT, so he stressed the importance of finding out what the specifics are of an individual plan. 

As part of the de-risking process, Gaul pointed out it is not necessary for plan sponsors to commit to fully offloading all of their risk—or even to settle on one strategy. A partial de-risking is possible: Plan sponsors can choose to focus on just longevity or a particular segment of the participant population—those who have smaller account balances, recent retirees or retirees who left the company 20 years ago. De-risking strategies are not one-size-fits-all, Gaul said, and can be phased into a plan. A partial LDI, buyout or buy-in is an option for plan sponsors who are unable to complete the process, but he cautioned that smaller plans may be better off being terminated completely.

If you are considering the costs and benefits of a pension risk transfer, take into account the costs you incur just by waiting to make that decision. In many causes, Gaul said, holding onto the plan can ultimately be more expensive as Pension Benefit Guaranty Corporation (PBGC) premiums, administrative costs and longevity risk add up. No one argued that improved life expectancy is good for participants, but Unhoch noted that sponsors of DB plans do take losses on the tail end of that trend.

Rowlins suggested working with an adviser and actuary to find the best solution, adding that holistic evaluation of the business model is critical. Gaul said plan sponsors’ “last act” as a fiduciary to these plans will be picking the safest possible annuity provider. The most important question to consider, according to Unhoch, is how much certainty is worth to your plan. 


Sara Kelly 

Fees: 3 Steps Every Plan Sponsor Should Take

June 7, 2013 (PLANSPONSOR.com) - Everywhere that plan sponsors turned over the past 18 months, they heard talk of fee disclosure.

Since July 1, 2012, covered service providers have been required to comply with ERISA section 408(b)(2), by providing details of the compensation received both directly and indirectly for the services they deliver. It appeared there was no escape. But as July 2012 came and went, what happened to those disclosures, and more importantly, what did plan sponsors do with the disclosures they received? 

Some plan sponsors, eager to check the box that the disclosure was received, may have simply filed the document away and moved on to the next task at hand. There are, however, still some necessary steps. Plan sponsors must fulfill their fiduciary responsibilities; by both filing the disclosure itself and ensuring the services they are receiving are reasonable for the fees being paid.

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Plan sponsors need to take three critical steps, as part of a documented fiduciary process regarding the fee disclosures from their covered service providers:

1. Confirm the disclosure is complete and understandable

Your covered service providers must provide you with an understandable and thorough compensation breakdown. While various formats can be used to detail fees, if you can’t do the math or if the fees are unclear, you should ask the provider for clarification.

 

The disclosed fees need to reflect both direct and indirect fees the service provider receives, including the fees from subcontractors or affiliates of the provider. If you believe your provider is not being forthcoming with their disclosure, or doesn’t provide a new disclosure when their fees change, it is your responsibility to request the clarification. It is important to note that a plan sponsor is responsible for taking action to make sure the disclosure received meets the requirements.

2. Benchmark your fees and services to the marketplace

Once you understand the fees being charged for the services provided, you have the responsibility for making sure the fees are reasonable. Many plan sponsors do this by hiring an outside expert who has knowledge of the marketplace and understands the buying power of plans with characteristics similar to yours.

There are two ways plan sponsors can do a market check of their fees and services. Depending on the state of their current vendor relationship, a Request for Information (RFI) or a Request for Proposal (RFP) should be performed. Either of these methods can be done on a “blind” or a fully disclosed basis: either the vendors need not know it is your company doing the market check, or you can disclose your company’s name to the participating vendors. If the plan sponsor desires to retain the services of their current vendor, then the RFI can be performed. This is a watered-down version of the RFP, whereby you ask vendors to provide their fee proposal for the services they would offer to you and your participants.

Knowing the fee points of other vendors in the marketplace provides two benefits. You will be able to (1) determine whether the fees you are being charged by your current vendor are reasonable, and (2) negotiate, if necessary, with your current provider, with the awareness of your marketplace buying power. Arming yourself with this information is critical to determining the reasonableness of your plan’s fees.

The other approach is an RFP, which is a formal process. It involves providing vendors with a questionnaire to obtain a more in-depth understanding of their services, having the vendors present their capabilities in-person, and then selecting a new vendor for the plan services. Assuming a vendor other than the incumbent is selected, this process ultimately results in a conversion of the entire plan to a new vendor. Given the complexity of this method and the time needed to devote to its successful completion, a plan sponsor will typically only undertake this approach if their current vendor relationship is beyond repair.

 

3. Establish the frequency with which ongoing reviews will occur

In the fast-paced retirement plan industry the landscape changes rapidly. Competition among vendors has driven fee levels down at a mind boggling speed. Vendors service platforms change quickly to maintain competitiveness and market share. In this environment, a best practice for plan sponsors is to perform a market check either through a RFI or RFP of their fees and services every three to five years. This frequency should be documented to establish your responsibility for looking at your plan fees on a regular basis.

Keep in mind it is not necessary to select the provider with the lowest fee proposal. ERISA states that it is the plan sponsor’s responsibility to ensure that fees are reasonable and necessary for the service provided. A more robust service platform may generate a higher fee level. A plan sponsor must only establish that the fees being paid are reasonable for the services provided.

Conclusion

Following these steps and documenting the actions taken would be prudent for plan sponsors who are looking to fulfill their fiduciary responsibilities regarding fee disclosure...have you done this?

 

Patrick Coughlin, Vice President, director of Corporate Retirement Services, Cammack LaRhette Consulting

 

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.

 

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